RBI stance on inflation, growth and government securities acquisition program key for rupee movement, going ahead


Rupee appreciated sharply against the US dollar and it was more of global than domestic factors that influenced the move for the currency. In May, the rupee rose by over 2 percent and weakness in the dollar was the primary trigger. On the domestic front, FIIs continued to remain net sellers for the second successive month – both in equity and debt segments. In April and May, the total net sell figure was to the tune of $ 1.9 billion.

At the end of the month, gains for the currency remained restricted ahead of the important fiscal deficit and GDP number. Data showed, the central government’s fiscal deficit ended a little below the revised estimates presented in the Union Budget in February. The government’s fiscal deficit settled at Rs 18.2 lakh crore, or 98.5 percent, of its revised estimate of Rs 18.49 lakh crore. The revenue deficit settled at Rs 14.54 lakh crore, or 99.8 percent, of its revised estimate. At the same time, GDP for Q4 showed the economy grew at 1.6 percent.

Going ahead, volatility for the currency could be curtailed after data showed that RBI continues to build its reserves and it is at an all-time high level of $ 592.89 billion.

For the month, on the domestic front, market participants will be most importantly keeping an eye on the RBI policy statement. Expectation is that the central bank would maintain a status quo on rates, but the commentary is likely to trigger volatility for the currency. RBI’s stance on inflation, growth and the government securities acquisition program will be important to gauge a view for the currency.

Any dovish statement from the governor is likely to restrict further appreciation for the rupee. Dollar that has been weighed down against its major crosses would also influence the rupee. We expect the USD/INR (Spot) to trade sideways with a positive bias and quote in the range of 71.80 and 73.50 per US dollar.

Global Currencies

Dollar had a sustained fall against its major crosses along with US treasury yields after mixed set of economic numbers released from the US which have either been in-line with estimates or disappointing. The first trigger came in from the non-farm payrolls number that showed the economy added only 2,66,000 jobs last month after rising by 7,70,000 in March.

During the month, dollar losses remained restricted after FOMC meeting minutes showed that some members mentioned that it would be appropriate “at some point” to discuss tightening its accommodative policy.

This month, market participants will be awaiting updates on the infrastructure bill that is proposed. At the same time, on the economic calendar, US Fed policy statement will be keenly watched, especially after a little hawkish commentary in the policy statement. We expect that could restrict further weakness for the dollar and also provide some support at lower levels.

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